Plan Corrections: Update on the Employee Plans Compliance Resolution System (“EPCRS”) 2008 Western Benefits Conference J

1. Plan Corrections: Update on the Employee Plans Compliance Resolution System (“EPCRS”)2008 Western Benefits ConferenceJuly 15, 2008 Avaneesh Bhagat Internal Revenue Service Sherrie Boutwell Boutwell Fay LLP

2. Agenda • EPCRS Overview • New Revenue Procedure? • Case studies/questions

3. EPCRS Revenue Procedures • Revenue Procedure 2006-27 is the current applicable document for EPCRS • New revenue procedure may be issued in June/July 2008 • Transition period

4. EPCRS Programs • EPCRS consists of three correction programs • Self Correction Program (SCP) • Voluntary Correction Program (VCP) • Audit Closing Agreement Program (Audit CAP)

5. Types of Plans covered • Qualified Plans under IRC § 401(a) • 403(b) Plans • SEP and SARSEPs under IRC § 408(k) • Simple IRAs under IRC § 408(p)

6. EPCRS Objectives • For qualified plans • Continued qualification of the plan under IRC § 401(a) • For 403(b) plans • Avoid income inclusion for participants and income tax withholding liability • For SEPs and Simple IRAs • Continued compliance with IRC § 408(k) or 408(p), as applicable

7. Other possible goals • Excise/Income tax relief: • IRC § 4974 (VCP and Audit CAP). • IRC § 4972 (VCP only. For contributions made to fix VCP failures) • IRC § 4979 (VCP only) • IRC § 72(p) (VCP only)

8. Correction Principles • Full correction includes all taxable years, whether or not the taxable year is closed • The correction method should restore the Plan and its participants to the position it would have been in had the failure not occurred. • The correction should be reasonable and appropriate for the failure. • Appendix A/B- correction deemed to be reasonable • Other: Consistency with the IRC ; Provide benefits to NHCEs; Keep assets in plan

9. “New Revenue Procedure” Expected changes • Expansion of streamlined application procedures “Appendix F” • Interim/good faith non amenders ($375) • Other non amender issues • SEPs, SARSEPs and SIMPLEs • Plan loans (½ fee schedule if not more than 25% of employees affected)

10. “New Revenue Procedure” Expected changes • Appendix F expansion contd.. • Employer Eligibility Failure • Excess deferrals (402(g) limit) • Failure to make required minimum distributions (401(a)(9)) ($500 if not more than 50 employees affected) • Failures corrected using SCP plan amendments permitted under App. B 2.07 (inclusion of ineligible employee, hardship distributions/loans, compensation violations 401(a)(17))

11. “New Revenue Procedure” Expected changes • Appendix D for other VC applications • Clarifies situations that require determination letter applications • Easier to correct 72(p) problems in VCP • Clarification of instances where the DOL calculator can be used to determine earnings • Additional examples for addressing excluded employee issues.

12. Plan Corrections: Correction by retroactive plan amendment • Audit CAP/VCP: Amendment should not violate 401(a) incl. 411(d)(6), 401(a)(4), and 410(b). • SCP- Limited to situations described in App. B 2.07 (ineligible ees, hardship, loans, 401(a)(17)) • Retroactive amendment issues (Case studies 1 and 2)

13. Plan Corrections: Update on EPCRS • Case Study #1: Correcting a favorable vesting failure: Company established a profit sharing plan. Intent and operation was to fully vest anyone employed before date adopted, but plan document did not reflect this. Company proposes to correct by retroactive amendment to allow all employees hired prior to adoption date to remain fully vested. Should this be permitted?

14. Plan Corrections: Update on EPCRS • Case Study #2: Correcting an unfavorable vesting failure: Company amends and restates its plan for EGTRRA in 2003 and checks wrong box on vesting schedule. Plan operates on new 5 year vesting schedule but plan provides for old 2 year schedule. SPD and all other plan communications provide for 5 year schedule. Company proposes to correct by retroactive amendment to 2003 to provide for 5 year vesting. What might the IRS need to see to be persuaded to accept this as an acceptable correction?

15. Plan Corrections: Update on EPCRS • Case Study #3: Correcting an impermissible distribution: Company has two owners who are the only participants in a profit sharing plan invested solely in real estate. They add employees and amend the plan into a 401(k) plan, applying 401(k) distribution restrictions to all funds. Plan offers self-directed accounts in mutual funds. Owners allocate real estate solely to selves, and do not offer this investment to the other participants because they are concerned that the investment carries too much risk and too little liquidity for the average NHCE participant. And, in fact, the real estate does not perform as well as the mutual funds.

16. Plan Corrections: Update on EPCRS • Case Study #3: Correcting an impermissible distribution: Plan switches record keepers and are told the real estate must be held in a “sub-trust”. So they move it to a sub-trust. Several years later, plan switches record keepers again and -owners are told that new record keeper does not allow sub-trusts and to get rid of the real estate. Owners distribute the real estate in kind to themselves and file form 1099 and pay tax on the distribution.

17. Plan Corrections: Update on EPCRS • Case Study #3: Correcting an impermissible distribution: Prior record keeper is not aware of distribution and transfers too much money to successor trustee by amount of real estate. Owner retires and takes a distribution (of too much $) and rolls the funds to an IRA Prior record keeper demands return of overpayment and threatens to sue.

18. Plan Corrections: Update on EPCRS • Case Study #4: Correcting an failed safe harbor notice Company established a “safe harbor” plan and notifies employees in accordance with all requirements during the first open enrollment. Company holds annual meetings and tells employees about the safe harbor plan, gives a safe harbor notice to all new employees, but fails to give an annual written notice. How should this be corrected?

19. Plan Corrections: Update on EPCRS • Case Study #5: Correcting a 415 Excess The new regulations under Section 415 no longer specifically provide for correction methods for excess contributions. The preamble to the 415 regulations stated that plans could continue to self correct using the methods outlined in the old regulations, if the requirements of EPCRS were met. What if the plan is amended to comply with the new regulations and language allowing the correction is deleted?

20. Plan Corrections: Update on EPCRS • Case Study #6: Correcting the failed correction Plan experiences a partial termination in 2003, resulting in a large amount of forfeitures. In the same year, the plan is amended to allocate forfeitures based on account balances and all forfeitures are allocated for that year, but not in subsequent years. Several years later, Company is told to correct the vesting under the partial termination. Plan uses forfeitures in the suspense account to correct the partial termination error. How should this error be corrected? Is it eligible for self correction?

21. Plan Corrections: Update on EPCRS • Case Study #7: No Determination Letter Leasing organization adopts an individually designed 401(k) plan and offers it to its employers for 20 years. Each year, the plan is amended in a timely manner to comply with changes. No DL is ever requested. Can counsel “find” a document failure and submit under VCP?

22. Plan Corrections: Update on EPCRS • Case Study #8: No failure admitted In-house counsel requires that the employer maintain errors & omissions insurance for the benefit of officers, directors and plan fiduciaries. Counsel is aware that insured must immediately report potential claims to the insurer and may not admit liability, but must be willing to defend all claims. Company wishes to submit under VCP but does not want to admit error and risk losing insurance coverage. Can the company file a VCP without admitting a failure?

23. Plan Corrections: Update on EPCRS • Case Study #9: Failed correction #2 Company does not complete ADP/ACP testing on time for several years. When tests are finally done, in Year 1, the plan failed, in year 2 it did not and in year 3 it did. Company corrects each failure but miscalculates and therefore over-distributes refunds for year 1, and miscalculates and under distributes refunds for year 3. Can the Company offset the over and under distributions in Years 1 and 3 when calculating the new correction?

24. Plan Corrections: Update on EPCRS • Case Study #10: Conflicting advice • Plan has serious and expensive qualification defects – correction under the normal self-correction guidelines under EPCRS could cost millions of dollars • Company is not publicly traded, but has a large number of unrelated shareholders • You advise filing under VCP, proposing a creative and less costly correction, but there are no guarantees this will be accepted by IRS

25. Plan Corrections: Update on EPCRS • Case Study #10: Conflicting advice • Plan gets 2d opinion: advice is to freeze the plan, start a new one, wait for 3 years (i.e., until the statute has run) and then merge the two back together • Company wants to know why it should go to IRS, what the risks are and how to minimize the risks

26. Plan Corrections: Update on EPCRS • Case Study #10: Conflicting advice • FASB 48 (June 2006) regarding disclosure of uncertain tax positions. Need to conclude that it is more likely than not that the taxpayer will prevail with respect to any uncertain tax position, or disclose the risk on its financial statements, in order to meet GAAP standards. Filing under EPCRS should be sufficient so that the taxpayer would not have to disclose the potential liability (except perhaps the potential correction costs).

27. Plan Corrections: Update on EPCRS • Case Study #10: Conflicting advice • Certain penalties can apply to “tax return preparers” (including advisors who do not sign returns) where the “more likely than not” standard cannot be reached and/or disclosure of the uncertain position on the return is not made.

28. Plan Corrections: Update on EPCRS • Case Study #11: Errors repeated • Company has a divided board of directors composed of management and certain dissident shareholders. The dissidents refuse to approve most resolutions, even adoption of required interim amendments. The Company is publicly traded, so the board members cannot be easily replaced.

29. Plan Corrections: Update on EPCRS • Case Study #11: Errors repeated • Company fails to adopt a required amendment and submits under VCP. Three years later, the Company experiences the exact same error for the exact same reason. Can this be submitted under VCP?

30. Boutwell Fay LLP Sherrie Boutwell Boutwell Fay LLP One Park Plaza Suite 600 Irvine, CA 92614 (949) 660-0484 (949) 660-0485 (fax) sherrieboutwell@boutwellfay.com www.boutwellfay.com

31. Internal Revenue Service Avaneesh Bhagat E mail: Avaneesh.K.Bhagat@irs.gov Phone: (949)389-4420 Fax: (949)389-5017 Address: 24000 Avila Road, MS 3000 Laguna Niguel, CA 92677 Retirement Plans web site: www.irs.gov/ep